Trump is the Rare Honest Politician about U.S. Debt

Once again Donald Trump’s presidency has done a great job of highlighting the hypocrisy and delusion of the beltway bubble.

A recent story from the Daily Beast reports that Trump is frustrating advisers with his apathy towards the current trillion dollar deficits coming out of Washington.

Since the 2016 presidential campaign, Donald Trump’s aides and advisers have tried to convince him of the importance of tackling the national debt.

Sources close to the president say he has repeatedly shrugged it off, implying that he doesn’t have to worry about the money owed to America’s creditors—currently about $21 trillion—because he won’t be around to shoulder the blame when it becomes even more untenable.

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the national debt in the not-too-distant future. In response, Trump noted that the data suggested the debt would reach a critical mass only after his possible second term in office.

“Yeah, but I won’t be here,” the president bluntly said, according to a source who was in the room when Trump made this comment during discussions on the debt.

Trump’s lack of concern for the debt should hardly be surprising. As a candidate, he boasted about his desire to preserve various entitlement programs while simultaneously promising significant increases in military spending – a promise he has delivered on. Left unsaid in the report is that the goal of at least some of Trump’s advisors was undoubtedly to encourage the president to embrace some form of tax increase. We know, for example, that Treasury Secretary Steve Mnuchin has encouraged Trump to embrace a VAT tax in the past, a policy that would be particularly damaging to America’s low and middle class.

What’s all the more comical, however, is the resulting jeering from DC pundits and political enemies acting as if Trump’s view on the debt is some radical new threat to American stability. On the contrast, all Trump is doing is being honest about the views held by almost everyone that has served in Washington the past several decades. While politicians from both parties love to give lip service to “fiscal responsibility”, the closest thing we’ve come to meaningful action on budgetary restraint was the budget sequestration of 2013. Of course those cuts to future spending increases (not to be confused with actual spending cuts) came into place simply because of the inaction of federal legislators and faced instant bipartisan condemnation.

This isn’t the first time that Trump’s truth telling over the debt has thrown opposing politicians and pundits into a tizzy. On the campaign trail, Trump was accused of threatening financial Armageddon when he suggested that America could default on its debt. What should be obvious to anyone who has paid even passive attention to American politics is that US default is inevitable. The only question is what form will it take.

One of the greatest myths in DC is that America has never defaulted on its debt, something repeated not long ago by Fed Chair Jerome Powell in a Congressional hearing. Of course this is simply absurd.

As James Grant and other financial historians have explained, the federal government has defaulted numerous times in its history, the most recent of which occurred when Richard Nixon closed the gold window. In that case, the out of control spending, led by the Vietnam war and LBJ’s Great Society, led the US to default on its obligations to foreign governments, repaying their loans with dollars valued at far less than the $35 per ounce they were promised.

Another option, one that Murray Rothbard advocated, is simple debt repudiation. As he wrote in 1992, when US debt was a quaint $4 trillion:

I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: outright debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from “normal” public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a past ruling elite who contracted these debts at our expense? One of the cogent arguments against paying blacks “reparations” for past slavery is that we, the living, were not slaveholders. Similarly, we the living did not contract for either the past or the present debts incurred by the politicians and bureaucrats in Washington.

Rothbard goes on to suggest that a more traditional debt restructuring – similar to what Trump touched on during his campaign – could also be an option if outright repudiation was considered to be “too draconian.”

The government is an organization, so why not liquidate the assets of that organization and pay the creditors (the government bondholders) a pro-rata share of those assets? This solution would cost the taxpayer nothing….The United States government should be forced to disgorge its assets, sell them at auction, and then pay off the creditors accordingly….This combination of repudiation and privatization would go a long way to reducing the tax burden, establishing fiscal soundness, and desocializing the United States.

[T]he idea that the US can never restructure or even repudiate the national debt — that US Treasuries must always be treated as a unique and magical “risk-free” investment — is wildly speculative at best, preposterous at worst. Every other borrowing entity — individuals, business firms, and governments — has the option of renegotiating interest payments and even defaulting on loans. It is hardly an extraordinary event, even for sovereign borrowing — that’s why lenders charge a risk premium beyond the return they require to compensate for time preference.

There is lots of evidence on private, corporate, and sovereign defaults, and the results are hardly catastrophic. Depending on the circumstances, the benefits of reducing debt can exceed the costs of harming the borrower’s reputation and thus increasing the costs of future borrowing. Anyone who has been through a personal or corporate bankruptcy knows this.

At the end of the day Trump’s views on dismissal of US debt illustrate another example of short-sighted economic thinking. It’s absurd, however, to treat this as some radical change from his more “dignified” and “respectable” predecessors. Instead, just like his views on tariffs, monetary policy, and defense spending, Trump’s real sin is simply being a continuation of the status quo on these issues.

The difference is that Trump says out loud the part politicians are supposed to keep quiet.